Fears about the effect of new European insurance rules on infrastructure investment may be misplaced, according to research by four Master of Finance (MFin) students at Cambridge Judge Business School cited in a recent Standard & Poor’s Ratings Services report.
While many insurers fear that new European capital requirements known as Solvency II will limit their ability to invest in infrastructure projects, the research shows that the new rules may not be as negative as they first appeared and in fact may boost infrastructure investment by some insurers.
The findings are cited in a recent report on RatingsDirect – a Standard & Poor’s web portal used by financial companies – entitled “Solvency II could be a double-edged sword for infrastructure investment”. Solvency II will apply beginning January 2015 to the insurance and reinsurance industry across the European Economic Area, which includes the European Union and some other countries.
The four Cambridge Judge MFin students who contributed to the report are Andres Arboleda, Simon Barrington, Sheran Deng and Jason Hsieh. The primary credit analyst for the report is Miroslav Petkov of Standard & Poor’s in London.
“We believe that Solvency II is more favourable than Solvency I (the existing rules) for infrastructure investments,” says an Overview section of the report. It also says that Solvency II has “features that could stimulate infrastructure investments” and “should promote more disciplined investment in infrastructure by insurers.”
The report draws on some of the findings by the four Cambridge MFin students, who conducted the research as part of their Master of Finance Group Consulting Project (GCP). The students were asked by Standard & Poor’s to look into the impact of Solvency II to determine whether its introduction is likely to have a positive or negative affect in the way insurance companies invest money in infrastructure.
As part of their research, the students modelled data on infrastructure project default and recovery rates. They also attended important risk conferences, and conducted in-depth interviews with industry participants and academic experts. The project culminated in the students presenting their findings to senior management at Standard & Poor’s at their offices in London.
Michael Wilkins, Managing Director, Infrastructure Finance Ratings at Standard & Poor’s, who was the client project supervisor for the Cambridge MFin students, said: “I would like to express gratitude to the team for doing this project and also for agreeing to convert their presentation into a written report.”
Andres Arboleda, one of the students who worked on the project, said: “The GCP offers the opportunity for MFin students to become consultants for real-life cases that top financial companies face daily. It also offers the chance to think out of the box and propose solutions that others might have not contemplated.”